How DAOs are shaping the future of the digital world
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The idea behind Decentralised Autonomous Organisations is to create self-sustaining, community-driven entities governed by smart contracts on blockchain networks. However, the legality and regulatory framework surrounding  DAOs remain a topic of debate

November 27, 2023 10:30 am | Updated 10:30 am IST

For representative purposes.

For representative purposes. | Photo Credit: Getty Images

Decentralised Autonomous Organisations (DAOs) represent a groundbreaking innovation at the intersection of blockchain technology and governance. These digital entities operate without centralised control and are governed by smart contracts and the consensus of their members, often utilising cryptocurrencies as a means of decision-making and resource allocation. DAOs have garnered attention for their potential to change various industries, including finance, art, and governance, by fostering transparent, democratic, and self-executing systems. These entities are not only reshaping traditional business structures but also challenging the way we perceive trust, governance, and collaboration in the digital world.

The genesis of DAOs

DAO is an organisation represented by rules encoded as a computer program that is transparent, controlled by the respective organisation members, and not influenced by a government. The idea behind DAOs is to create self-sustaining, community-driven entities governed by smart contracts on blockchain networks. These smart contracts automatically execute predefined rules without the need for intermediaries, ensuring trust through code rather than traditional authorities. One of the most important aspects of DAOs is their potential to change the idea of collaboration. They enable global, borderless cooperation on an unprecedented scale. Participants, often referred to as token holders, can propose and vote on decisions related to the organisation’s goals and resources. This decentralised decision-making process ensures that no single entity holds undue influence.

The various use cases

DAOs are already making their mark across diverse industries. In the realm of decentralised finance, platforms like Compound and MakerDAO have introduced lending and borrowing services, enabling users to participate in the global financial ecosystem without relying on traditional banks. In the art world, artists are tokenising their creations and utilising DAOs to manage royalties and maintain control over their intellectual property.

Supply chain management is another arena where DAOs are gaining traction, as they offer transparency and traceability in global supply chains, ensuring the authenticity and quality of products. Even in the governance of online communities, DAOs have emerged as tools for decision-making, with platforms like DAOstack facilitating decentralised governance structures for internet communities. These examples showcase the versatility of DAOs, demonstrating their potential to reshape industries across various sectors.

Implications for the digital world

DAOs are ushering in a transformation in the digital world by embodying several key principles. Firstly, they are decentralising entities, shifting power away from centralised authorities and placing it firmly in the hands of the collective. Decision-making within DAOs becomes a democratic process, where token holders have a direct say, resulting in a more equitable distribution of influence. For instance, in a DAO governed community-driven project, contributors worldwide can participate in shaping its direction, diminishing the dominance of a single central entity.

Secondly, transparency and trust are fundamental tenets of DAOs. Smart contracts that underpin DAO operations are transparent and immutable, fostering trust among participants. Rules are predefined and require consensus for alteration, minimising the need for intermediaries. This transparency can potentially disrupt traditional industries by eliminating the opacity often associated with centralised organisations.

Thirdly, DAOs champion inclusivity, democratising access to resources and opportunities. They transcend geographical and socio-economic barriers, enabling global participation. This inclusivity not only promotes diversity but also fuels innovation, as individuals from various backgrounds collaborate to create innovative solutions.

Lastly, DAOs inspire new forms of collaboration. They facilitate global cooperation, allowing participants with shared goals to unite without the need for intermediaries. This dynamic environment fosters innovation and cooperation as ideas flow freely, unencumbered by hierarchical structures. Together, these principles underscore the transformative potential of DAOs, paving the way for a more decentralised, equitable, and collaborative digital future.

The challenges and controversies

The journey of DAOs has not been without hurdles. The infamous DAO hack in 2016 exposed vulnerabilities in the code, leading to a contentious hard fork (a hard fork refers to a change in a network’s protocol that makes previously invalid blocks and transactions valid, or vice-versa) in the Ethereum blockchain. This incident highlighted the need for rigorous security audits and raised questions about the immutability of blockchain systems.

Moreover, the legality and regulatory framework surrounding DAOs remain a topic of debate. Traditional legal systems are still catching up with the decentralised nature of these entities, leaving room for uncertainty in many jurisdictions.

Regulatory uncertainty looms large as jurisdictions grapple with classifying and regulating these decentralised entities. DAO tokens, often representing ownership or participation, can potentially be considered securities, subjecting them to complex regulatory requirements and compliance challenges. Legal liability within DAOs remain elusive, with decentralised decision-making and automated smart contracts making it difficult to assign responsibility for actions taken. Issues like smart contract vulnerabilities and security breaches introduce questions of legal recourse and liability. Taxation of transactions within DAOs, identity verification, and compliance with Anti-Money Laundering (AML) and Know Your Customer (KYC) regulations further add layers of complexity to the legal framework. Dispute resolution, often relying on code-based solutions, present a unique challenge in the absence of traditional legal mechanisms.

Amongst these challenges, stakeholders are actively working to establish legal frameworks that balance innovation with compliance. DAO creators, participants, and regulators are collaborating to develop guidelines that accommodate the unique characteristics of DAOs within existing regulatory structures. They aim to address concerns such as governance, intellectual property, and cross-border operations while ensuring transparency and fairness in token-based decision-making.

As DAOs continue to evolve and proliferate, it is imperative that legal experts, blockchain developers, and policymakers engage in ongoing discussions to create a legal framework that allows DAOs to harness their transformative potential while adhering to the complexities of the law. Finding this delicate balance is essential for the future coexistence of decentralised innovation and legal compliance.

In conclusion, DAOs represent a pivotal shift in how we organise and collaborate in the digital world. While challenges and uncertainties remain, the potential for DAOs to drive positive change in various sectors is undeniable. It is crucial for regulators, developers, and participants to work collaboratively to harness the full potential of DAOs while addressing their evolving challenges.

These decentralised entities are shaping the digital future, and the possibilities they offer are limited only by our collective imagination.

Sanhita works in the Applied Law and Technology Vertical of Vidhi Centre for Legal Policy.

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